Stock Market Mayhem, A Time For Correction Or Emerging Facts? A Slowing Economy And Rupee Dip To Its Lowest, 86.57—What’s Happening?

The Indian stock market, after a stellar streak, appears to be losing steam, and the reasons are aplenty.

First up, inflation remains sticky, and signs point towards an economy in decline. Adding to the woes are dwindling corporate returns and significant foreign outflows. The outlook is far from optimistic.

According to a Bloomberg survey of 22 strategists and fund managers, the benchmark NSE Nifty 50 Index is likely to drop at least 5% in the three months through March. Concerns over geopolitical tensions, especially during Donald Trump’s second presidency, further compound the challenges for local stocks.

As a result, India’s nearly $5 trillion equity market, which hit multiple new highs last year, has come under pressure. Foreign outflows, triggered by fears of falling consumption, have led to a $556 billion decline in the aggregate market value of companies in the MSCI India Index, which has fallen more than 13% from its September peak.

Growth concerns are intensifying as the latest government figures show the economy is projected to expand by 6.4% in the current fiscal year—a significant dip from the 8% average of the past three years. December saw vehicle sales fall, and consumer companies have flagged challenging market conditions. HSBC strategists, including Herald van Der Linde, downgraded Indian stocks to neutral, citing a reduction in FY25 earnings growth estimates for the Nifty 50 from 15% to 5%.

While some survey respondents predict negative returns for the benchmark this year, about one-third expect the Nifty 50 gauge to rise by 10% to 15% in 2025. This optimism is largely driven by continued domestic investor inflows. Despite an 8.4% drop last quarter, the Nifty 50 managed an annual gain of 8.8% in 2024, marking its ninth consecutive year of growth.

“If we step back from the near term, we are at the inflection of an economic boom,” said Vikas Gupta, chief investment strategist at OmniScience Capital. Gupta forecasts a more than 10% climb in local shares, emphasizing that interest-rate cuts will set the broader direction for the Indian stock market. Sectors like healthcare and information technology, buoyed by the record-low rupee, are expected to be key gainers this year. However, none of the respondents expressed bullishness on real estate, which has already seen a staggering 110% rally over the past two years.

The stock market’s tumble on Monday, breaching key support levels, has shaken traders and left investors concerned. Is this merely a healthy correction, or does it signal deeper troubles?

The main reason behind all of this is the surge in US bond yields. Back in September last year, the US bond yield was around 3.6%. Now, it’s about 4.8%, which is more than a 100 basis point jump. When bond yields go up, stock valuations tend to drop, and that’s exactly what happened last year. The Nifty was trading at 23 times, and now it’s just under 20x.

So, this is mostly a reaction to the rising US bond yields. There’s also been some slowdown in growth, especially with election effects and weather issues, but it is likely that demand will just get pushed to the second half of this year. The real concern is the bond yield hike and the Trump euphoria that’s impacting the markets.

Looking at the bigger picture, things aren’t looking too great for Indian equities—rising bond yields, crude oil prices climbing, and a weaker rupee are all playing their part. But, the kind of market correction we’re seeing now hasn’t been seen in the last four years.

So, are valuations looking better? Definitely, yes. At 20 times on the Nifty, earnings yield is around 5%, and growth should pick up in the second half of the year. While the rupee has fallen by 2-3%, the dollar index has gone up by more than 9%, which means the rupee has actually been doing better than most other currencies.

As for the fiscal and current account deficits, things are looking good. The fiscal deficit is on a downward trend, and the current account deficit is around 1%. There are some risks to the trade deficit, but overall, the situation is improving. The upcoming Budget will likely focus on keeping this positive trajectory going, without any big stimulus that could mess with fiscal consolidation.

When it comes to market value, two segments are really standing out: large financial companies and commodities. Financials are still at the bottom of the NPA cycle, but they’re showing signs of improvement. Unsecured lending in smaller companies is seeing some pressure, but the larger banks are looking pretty solid. NIM pressure is easing, and the higher interest rates will actually help offset that. So, financials remain a good bet.

On the commodity side, prices are starting to pick up. Commodities that were dragging down earnings last year could make a comeback next year, with better volumes and realizations. Valuations here also look attractive.

Looking ahead, demand in domestic cyclicals should improve, especially with a focus on capex and development spending in the next Budget. Since we’re entering an election year, there won’t be any elections next year, so the government will likely prioritize development spending, and we should see the benefits of that in the market.

As for financials, the NPA cycle is still bottoming out for larger banks, which is positive. The pressure on NIMs is likely to recede, and with the higher-for-longer interest rate environment, the earlier expectations of rate cuts don’t seem to be materializing. So, NIM pressure should ease, and as demand picks up in the second half of the year, credit growth should improve. Some NBFCs have reported decent updates, and the growth and NPA cycle are looking favorable.

Gold, on the other hand, is in a different cycle. It’s not just about typical demand anymore. Central banks are buying up gold to diversify their forex portfolios, and that’s a big driver. As long as this trend continues, gold should perform well in this cycle.

Let’s talk about the Indian rupee now.

According to a report by the State Bank of India (SBI), the impact of Donald Trump’s presidency on the rupee is expected to be a short-lived one. While the rupee might face some ups and downs in the early days of Trump’s term, it’s likely to settle down soon enough, the report suggests.

On Monday, the rupee hit a new all-time low, falling sharply—its biggest drop in nearly two years. This was mainly because the U.S. dollar got stronger, there were potential outflows from local equities, and the central bank didn’t intervene much. The rupee fell to 86.5825 before closing at 86.5750, which marked a 0.7% loss for the day. This was its steepest drop since February 2023. On Tuesday, it was trading around 86.590.

The report also pointed out something interesting: the rupee has historically done better under Republican presidencies than under Democrats. It even went as far as saying the rupee is more vulnerable under a non-Trump or Democratic regime. So, despite the short-term volatility, it doesn’t seem like we’re headed for a repeat of the “Taper Tantrum” from 2013. That’s a good sign for analysts who believe the rupee’s current reaction to Trump’s presidency will likely be temporary.

The rupee started weakening in the latter half of 2024, mainly due to capital outflows and the strengthening of the U.S. dollar, which got an extra boost from Trump’s November presidential win. Since November 2024, the rupee has dropped by about 3% against the dollar. But, in the grand scheme of things, this depreciation is pretty mild compared to other global currencies.

SBI also noted that the domestic forex market remained relatively stable in the first half of 2024, thanks to capital inflows linked to Indian bonds being included in global indices. This helped to keep the rupee from being too volatile.

Going forward, the rupee is expected to adjust to the initial impact of Trump’s presidency and should stabilize in the coming months, easing fears of prolonged instability. However, economists from Standard Chartered and Deutsche Bank have predicted the rupee could weaken to 87 against the dollar by March 2025. They also warned that if the tariff war escalates and the Reserve Bank of India reduces its interventions in the forex market, the rupee might hit 87 even before the fiscal year ends.

While we’re looking at external factors, it’s also important to focus on internal solutions to reduce rupee volatility. One easy fix is to use and promote cheaper, indigenous alternatives for things that usually require foreign currency.

As far as SBI’s research, let’s be real—SBI’s research tends to lean a bit too positive, often glossing over the gaps. It’s pretty much a mouthpiece for the ruling government(s), so we should take their reports with a grain of salt!